Updating Chicago Properties without Capital Expenditure or Debt Webinar (text version)

The Chicago Metropolitan Agency for Planning (CMAP) recently launched a Commercial Building Program, which includes credit enhancements for Managed Energy Services Agreements that allow building owners to upgrade their facilities without capital expenditure or the assumption of debt. During this webinar, the program administrator at CMAP shared details on the program and answered questions regarding eligibility, benefits, and how to get started.

Below is the text version of "Updating Chicago Properties without Capital Expenditure or Debt," originally presented on March 8, 2012. In addition to this text version of the audio, you can view the presentation slides and a recording of the webinar (WMV 20 MB).

Chris Lohmann:
Hello and welcome. This is Chris Lohmann at the U.S. Department of Energy. I'm in Washington D.C. right now, and I'm very glad that all of you have been able to join us today for this webinar in which we introduce the Chicago program, the Energy Impact Illinois, to bring enhancements for the commercial real estate market to do energy efficiency retrofits to their buildings. I'm gonna first introduce Dan Olson from the Chicago Metropolitan Agency for Planning who will then introduce Energy Impact Illinois and their contracted program administrator, Sean Neill at Transcend Equity. So, Dan, it's over to you.

Dan Olson:
Cool, can you hear me now?

Chris Lohmann:
Yes, I can hear you.

Dan Olson:
Okay, sounds good. Hi, thanks, everyone. My name is Dan Olson. I'm the Senior Energy Efficiency Planner here at CMAP. Just to give you a little bit of background about CMAP. We're the metropolitan planning organization for the seven-county Chicago region here in Northeastern Illinois. As you may know, as part of the Better Buildings Grant we received a $25 million grant from the Department of Energy back in 2010, and we're working on the Better Buildings Neighborhood program. We partner closely with the City of Chicago and the City of Rockford, as well as the local utilities, the Department of Commerce and Economic Opportunity, and our local citizens utility board on this grant.

When we set up this program, we basically addressed and went after the three key barriers to energy efficiency adoption, which are access to information, access to finance and access to workforce. On that access to finance piece we developed a suite of financing programs, of which one of them is the Transcend Commercial Industrial Program, and that's what Sean will be here talking about today. A high-level overview, we're really gearing this program towards large commercial, sort of, greater than 250,000 square feet, basically, sort of, the typical loop building or even the suburban, sort of, complexes for commercial and industrial. So, I just invite you to listen and learn and engage with Sean, and then hopefully, some of you will be interested and we can move forward and try to make this program grow. So, thanks.

Chris Lohmann:
Okay, thanks very much, Dan. It looks like we're having a little technical problem. Sean, unfortunately, has gotten trapped in a cab which had a flat tire, and he has a phone that he's about to join us on as soon as he can get audio code. Dan, could you cover for me for 30 seconds while I get him that audio code and describe a little bit more about the programs?

Dan Olson:
Sure, absolutely. One of the other things I can maybe touch on quickly for those on the phone is for our commercial products. Besides this finance product, we also have a program that we're working with a group called IFF on. They are working a nonprofit commercial program which is somewhat similar to this in that we've set up a loan-loss reserve for nonprofits in the region. I'm not sure who's all on the phone so if there's any nonprofit or people who work with nonprofits, this might be of interest to you, but we, with that program, are trying to target and offer loans to nonprofit building owners that want to make adjustments to their buildings so, sort of, covering some unique and different spaces in the commercial side of things.

I guess – let's see. Chris, are you back on, or do you want me to keep going? I guess he's not back on, so I'll keep going. [Laughter] We also have in our financing package that suite I talked about before, for those who are interested, we do have a single-family residential program that is geared towards single-family homeowners in the region. Some of you may have seen this past fall we had an Energy Impact Illinois, a marketing campaigning called the Two Bills Campaign. It was basically the idea that two different energy bills were competing basically for your household, and you had the choice as a homeowner which type of bill you wanted. So, we geared that towards our single-family side, and that program is also up in development simultaneously with this.

And then, also, sort of, worth noting is our multifamily side of programs. We work with CNT Energy on a program called Energy Savers which is geared towards multifamily building owners, and for this program for EI2 it's probably one of the first that has a significant amount of uptake, and we've been actually starting to get retrofits done on that program. So, I'll just leave it at that. If there are questions on any of that stuff, you can feel free to write me or get in touch with me after this program. Chris, are you on the line? He might be coordinating. I will sit here. It looks like Sean is coming up the elevators in Willis Tower right now, so give me a couple minutes.

[Short pause]

Just for everybody on the phone, it looks like Sean is coming in the office right now. So, I'm gonna make sure he gets to the right office, and we can start the presentation.

Chris Lohmann:
Hi, this is Chris. I apologize for the disruption here. I've just got –

Dan Olson:
Hi, Chris, great. I'm sorry; I'm going to get Sean right now. He's in the office.

Chris Lohmann:
Oh, terrific, he's right on. All right, great. Well then, I'll take a little bit of time here and tell you all about how the Department of Energy is operating right now.

Dan Olson:
Yes.

Chris Lohmann:
This webinar today is the result of the Better Buildings Challenge which, as most of you all know, launched last December by the president to challenge corporate building owners and landlord real estate building owners to dramatically improve the energy efficiency of their portfolio. Along with that, we also had a number of firms and municipalities, state and local governments join us as folks who would help make this happen.

In Chicago, through Energy Impact Illinois and their partner, Transcend Equity Development Corporation, set up a specific program to do this. There are a number of other programs set up throughout the United State in other cities, counties and states that we're going to also be featuring in webinars and presentations very similar to this one. Our effort is to make sure that building owners of all shapes and sizes have the best information available to them about what their options are, how they can take advantage of programs that are out there helping them to make the most of their buildings and make sure that everybody gets the best possible value out of energy efficiency and clean energy upgrades to their buildings.

Dan Olson:
Chris, do you want to touch on the – do you know the other types of programs and, like, specifically in other cities, is there anything similar going on?

Chris Lohmann:
Absolutely, absolutely. Very similar to Chicago's program is a program sponsored by the New York City Energy Efficiency Corporation where they are looking at their local real estate market, finding the barriers due to energy efficiency upgrades that building owners are facing and trying to meet those head-on. They are putting together a number of different credit enhancement facilities to also encourage lenders and equity providers to get involved in this new type of investing for energy efficiency retrofits and to help building owners then unlock the value that's inside their buildings. So, they're doing a number of demonstration-type projects, and they're also working with a number of companies that have got cutting-edge technology for software controls and sensors that are going to make a quantum leap forward in that, again, building on this could unlock the value in their real estate assets.

Dan Olson:
So, Chris, we were joined by Sean Neill. He just got here so just so you know.

Chris Lohmann:
Fantastic. Well, I apologize for the realities of logistics interfering on this, but with this I'll introduce Sean Neill from Transcend Equity Development Corporation, partner to Energy Impact Illinois in their chosen administrator for their program.

Sean Neill:
Hi, everybody, sorry for the delay. Chris, are you gonna advance slides, or do I do it from here?

Chris Lohmann:
I've got it right here.

Sean Neill:
Great.

Chris Lohmann:
I can kick it over to you though. You're at Dan's computer right now?

Sean Neill:
Yep.

Chris Lohmann:
All right. You are now the presenter.

Sean Neill:
Great. I'm gonna focus mainly on – actually, I don't know if I have the slides up here. Oh, I don't have the slides, no. You better go back and advance them yourself, Chris.

Chris Lohmann:
Got it.

Sean Neill:
Okay. So, I'm gonna talk mainly about commercial property, but I'm gonna make some reference to private institutions, universities and hospitals, as well as industrial property today, and the gist of what these comments will focus on is how to make major capital improvements in buildings without putting debt on them, and that's a key gating factor for what Transcend does and what Energy Impact Illinois realized was a difference they could make in the market. So, if you could advance it, Chris, you can go past the next one as well.

So, my only preamble about technology is gonna be these first two slides. Most buildings in the United States are pretty old. You can click, Chris, and you'll see something like 70 percent or more are in the range of 30 years old or more, some much older, and a lot of them – if you advance, Chris, you'll see a lot of them have really old stuff in them. There's an old motor, some old air handlers and cooling towers, and there's a pneumatic thermostat which is a technology that's literally a hundred years old.

And so, you've often got energy systems in these buildings that are very old, and if you advance, Chris, you'll see there's replacements you can make like digital thermostats and variable frequency drives on your motors and new cooling towers and new air handlers that could save 20 – 50 percent on your energy bill. So, that's the only, kind of, traditional energy efficiency preamble I'm gonna make, and what I'm gonna part now and focus on is the financial barriers to why don't we make these investments to save that energy? 20 – 50 percent savings, that's pretty good. It's hard to get that kind of return anywhere in the market today. Why don't we fix our buildings?

Well, the first big reason with private commercial assets is debt. So, the mortgage which is gonna be relevant to the vast majority of private commercial property is gonna have language like this in it that says, "You cannot encumber the property with additional debt." So, what the mortgage lender is basically saying is when I underwrote this building, I underwrote the boiler, the controls, the lighting, everything that's in it, and so you cannot pledge those pieces of your real property to another debt provider. That's what the mortgage lender is saying, and this is a major, major inhibitor for a landlord making capital investments, that is making capital improvements.

If you can advance, Chris, the next barrier has to do with the way leases work in commercial property, and you can, kind of, page through this, Chris. Inside of rent, when I break it out, I have an expense component of rent, and what's left over is operating income to the landlord, okay? Now, in most leases, as expenses rise, the landlord doesn't pay for them; the tenant does. So, as expenses in the building rise after you've been through your first year of your lease, all rising costs are passed through to the tenant. It's literally called additional rent in your lease, okay? So, what the split incentive is is a problem of capital recovery where – if you'll go ahead and click through there, Chris, the landlord's gonna spend capital on a retrofit to save operating costs in the building, but what do they do? They shrink what's called expense escalation or that additional rent number, and they're gonna save on operating costs for the tenant, and that's just the reality of commercial property.

It is, as harsh as this sounds, it's actually financial irrational in many cases to make a retrofit when the savings don't go to the landlord. Some might say, "Oh, the landlord should invest to fix their building." Well, in many cases, the building is operating fine. It just is inefficient, right? The boiler still works. The chillers still work, and traditionally, if it ain't broke, we're not gonna fix it, and in this case, the landlord can continue to run their building just fine, and there's no imperative for them to save operating costs just for the tenant. So, another way to think about this problem is a dollar in operating savings to a landlord doesn't create a dollar in net operating income to the landlord. That is the split incentive. That's the best way to think about it.

Okay, so let's put these two problems together. You're gonna get, kind of, a double-whammy problem if you're a private landlord. You want to retrofit your property? You gotta use your own capital. That's problem Number 1 – and go ahead and click through, Chris. If you want to retrofit your own property, you gotta use your own capital because of the mortgage restrictions, and the return on your capital is horrible, okay? So, that's your double-whammy problem, and I've looked at a lot of buildings, and as a general rule, if you have the traditional problematic leases, either some kind of net lease or what's called a modified gross lease where you have expense passthroughs, you can take a five-year simple payback that the engineer calculated, and it's gonna be a ten-year payback on the landlord's investment. So, this is why retrofits don't get done. I gotta use my own capital, and my return is bad.

Now, there have been for 30 or 40 years a very brisk and inefficient market in energy services contracts. That structure does not work for private property, for private commercial property, and I'll explain why. The traditional energy services company offer a energy savings project, a savings guarantee to a property. You can go ahead and click through this, Chris. They offer energy services and a savings guarantee to the property, and the property pays for the project upfront, and there's this notion that the ESCO comes with money to the project. In fact, the ESCO comes with a lender partner, and the project funding for the property comes from GMAC or a GE Capital or something like that, and it's equipment finance. It is debt by another name. It's just another way to put debt on a property, right? And the debt service is paid by the property; it's not paid by the energy services company in a typical energy services contract.

So, if you don't like the savings you got, you still have to pay your lender, and you have to go back and try to claw the savings out of your guarantee. So, the problem with this for private property is it violates the mortgage, and the second problem is that it is subject to the split incentive that I talked about because that lease is just debt. Under the lease, that's considered a capital investment by the landlord, and it's not expensable to the tenant, and the last problem is that the profit is paid up front. So, the only recourse to ensure performance is through the guarantee.

So, these are the reasons why the conventional ESCO approach has not made much headway in private property, and I'm not bashing on that approach. I think it's been enormously effective in public property, but if you look at the data, its vast focus has been in public property for the last 30 or 40 years, 90 percent of its project focus has been there. So, it has made very little headway in private property. So, you can move ahead there, Chris, and we'll talk about what is a little bit different about the structure that Transcend Equity offers and Impact Illinois chose to try to advance in the Chicago area.

It's the managed energy services agreement, and that structure was developed to address exactly these two problems I described: the debt problem and the split incentive problem. So, what we're gonna do – we, Transcend Equity or the Energy Impact Illinois program – we're gonna take a building that has an inefficient use profile, right? We're gonna benchmark it and make sure it's inefficient, and then we're gonna run out its data for ten years and build an energy model of how it's functioning. So, you can go ahead and click through there, Chris. We're gonna build a model that adjusts for weather, occupancy and rates. So, we will be able to actually, using the model, reproduce the energy bills for the property, historical bills, and we're gonna use that billing model on a go-forward basis.

So, a managed energy services agreement has two components. The first is the building is going to agree to pay Transcend Equity the historical usage for the building, adjusted for weather, occupancy and rates. So, we're gonna be dynamic to the building. You can't just pick a fixed dollar; you gotta be dynamic, and Transcend is gonna pay the actual utility bill, whatever that is. So, we do not buy power. That is, we don't procure it. The building continues to procure its actual power source as it traditionally has. Transcend just pays the bill. The second piece of the agreement is Transcend gets to propose improvements to the building that the landlord can accept or reject. So, think of this as like a license to mine gas on a piece of property. We're essentially setting up a structure that allows us to mine the savings out of the building, and the structure is the building pays what it historically has paid. Transcend is gonna assume the responsibility for paying the energy bill. We then get to propose improvements the landlord can accept or reject.

If you can bring up the next bit there, Chris, that's the second piece of the agreement. So, it's not as though we can come in and do anything we want in the building. We're gonna propose specific retrofits the landlord can accept or reject. So, that's what a managed energy services agreement is. What this is as a market – in terms of a change in the way the market works, if we move to the next slides, MESA is the sale of energy efficiency as a service. So, we are now selling you environment. The landlord is doing the financial equivalent of nothing at all. They're paying what they've always paid.

Now, remember, it wasn't financially rational for them to make retrofits based on the economics of a project, given their debt problem and the lease problem. So, we're not asking them to take a big leap by doing the financial equivalent of nothing, and that's what it made sense for them to do before. They're continuing to pay what they used to pay, and we are going to then spend our capital to drive the cost of energy – or not drive the cost down, drive the usage down.

So, if you can click through this, Chris, we now are going to – all of our projects have to save at least 25 percent for them to make financial sense. So, we're gonna drive the usage down – when our screen comes back up we'll see it's – we're gonna drive usage down by at least 25 percent and take all the risk associated with generating a delta between the historical energy bill and the actual bill. There, now you see it. So, Transcend is going to take all the risk of generating that green block, okay? Now, the model that we create, that is our billing model, is third-party reviewable before we go into any contracts.

So, the savings themselves are entirely transparent, and those of you on the line who know the language of measurement verification, I think the way to think about this is our bill is the IPMVP or the Performance Measurement and Verification Protocol Option C, whole building at the meter measurement. You're gonna get billed on your baseline with adjustments for weather and occupancy, and we're gonna assume responsibility for paying your actual bill. Okay, so that's what makes it as innovation in the market.

If you can click through, Chris, I think we're gonna get an actual bill next. I'm not gonna spend too much time on this, but this is an actual MESA bill for an actual property in Maryland where we have a MESA project, and you can see that it has a base charge. That's what the building would've paid in 30-year normal weather with full occupancy, and then it has a series of adjustments. It has a discount for the vacancy that's in the building because that's less energy it's using and then a series of weather adjustments that follow that. So, the model usage of the building creates the actual bill, and then Transcend is paying the utility cost for this building.

So, you can move ahead, Chris, and we'll look at this structurally for a minute. Transcend is gonna, for every project, create a limited liability entity. This is not an innovation. This is the way projects get built in private real estate. Transcend is gonna create a limited liability entity that offers its managed energy services to the property. Our debt and equity providers are gonna fund that limited liability entity. So, there's a traditional real estate close where there entity gets funded. All of the costs necessary to implement the retrofit are set aside in that L.L.C., and then the property pays its historical energy usage. That's the modeled bill that you just saw in the previous slide.

They pay that into a lockbox, third-party fiduciary type arrangement, and then the lockbox has a requirement to peel off – the first cash out of the lockbox goes to pay the real utility bill for the property. Whatever the utilities are has to get paid first and satisfied before any other funds can come out of that lockbox. The utility provides to continue to provide energy to the property as it always has. The second payment out of the lockbox is to debt service and third to equity, and there's essentially a promote at the end to Transcend for its performance if it reaches the top end of the savings.

So, that's how it works. That's how it looks structurally. A key piece, if you click on through there, Chris, is that Transcend has had a – oh, a critical piece here is that Transcend doesn't actually implement these projects as a contractor. We are gonna engage the best local contractors in whatever environment we're working in. I've spent a huge amount of time in Chicago with the local Mechanical Contractors Association, built a number of partnerships among local engineering firms. Transcend is not vertically integrated such that we do all this stuff in house. We are essentially the funder, and we're gonna tap the best talent we can to develop our energy models and the best contractors to implement our projects, and we usually make selections of those with the landlord. So, if the landlord has contractors they'd like to use, they often get to select them.

So, if you click on through, a key piece of this is we've had a great deal of accounting validation. Those of you who followed this particular sector know that it's critical that investments be on the balance sheet of the transaction entity, not on the balance sheet of the landlord, and this has been validated and pressure tested multiple times, and Transcend is, kind of, unique in the market for the amount of scrutiny that we've had, and so that's a key piece. These things hang together. We need to be capital on our own balance sheet, not capital on the landlord's balance sheet. Okay.

So, why does MESA work for a commercial property? Because you can't plug in capital – and you can just click through this, Chris, you can't plug in capital and shrink operating expenses and grow net operating income because the capital, first of all, can't be debt, and the operating expenses don't make it through the black box of real estate to grow net operating income for the landlord. So, that notion of shrinking operating expenses to grow income for the landlord doesn't work. What you've gotta do is plug in as an operating expense. MESA is operating, not capital, and that's kinda belt and suspenders, following GAAP, following the new accounting rules as well. There's no split incentive associated with MESA. It is a GAAP auditable operating expense.

So, remember the two problems we started with commercial real estate were the debt problem and the split incentive problem. Because MESA's operating, there's no split incentive, and secondly, there's no debt or liens that violate the mortgage. So, that mortgage issue I raised is really the first hurdle does not apply either. So, that's why MESA works. Now, some people go, "Well, you're getting the savings; what's the landlord get out of this?" I would say, first off, that for a project that has strong economics we can actually give some of the baseline savings back, but remember that typically the landlord in commercial real estate doesn't get savings anyway. So, in some ways, the concept of what you're trying to accomplish here is not around getting savings in the hands of the landlord. What the landlord's constraint is is capital, so the benefit to the landlord is a cost-neutral retrofit that's cost-neutral to the tenant. You're not increasing the tenant's costs, and you're not relying on the cost-recovery language in the leases. So, that's a huge benefit.

Now, let's talk in real hard nose real estate terms. What this really means to the landlord is a boost in asset yield. So, landlords are having this constant wrestling match over when and how they spend capital, and in October – November most landlords are going through a budgeting cycle, and they're trying to figure out what they can afford to spend on in the building. And so, you can go ahead and click through there, Chris. They bought or built a building to create a series of cash flows that they cap at a sale, and each year when they spend capital, that's a below-the-line cost. That is a drag on their cash flow. If you click through, Chris, you'll see that recurring capital expenditure pulls down their yield on their asset.

So, what we're trying to do – go ahead and click, Chris – is eliminate that recurring capital expenditure, or a big hunk of it, the capital expenditure associated with energy systems, and that's the same as dollars in the landlord's pocket, and that has cappable value at the sale of the property. So, that in essence, just to kinda encapsulate what MESA is, it's replacing the landlord's capital with our capital without putting debt on the property, and that would boost their yield. That is a good real estate strategy.

Okay, you can move on to – okay, what happens if I sell the property? I'm not gonna spend a ton of time on this because this is a little bit more involved, but first of all, the contract is readily assignable. There's nothing that encumbers the property or allows the MESA developer to prevent sale, so you can just assign the contract like you would a cleaning contract. The second is to terminate MESA. Now, what happens if I terminate MESA? Go ahead and click through, Chris, and you'll see there is an unwind cost associated with MESA that's tied to the savings we've created in the building. So, it's directly associated with the cash savings that if we were terminated, would belong to the landlord, okay? And that's cappable value.

So, if the landlord – our unwind fee declines with each year of our contract because there's not as much, you know, annual cash left in the contract, and if the landlord terminates us, some of the NOI, even though the retrofit project was typically not worthwhile for the landlord to invest their own capital in, if they sell the building, then it really has value, right? Because you're capping – that is, depending on your cost of capital, you're capping the value of that income stream, and the difference between the capped value and the unwind is the landlord's net benefit. So, the landlord's spent no money. You can go ahead and click through there, Chris, and see this. The landlord's gonna reap the cap value if they terminate the MESA contract and earn the difference between the unwind fee and the capped value.

And so, in this particular project which is based on a real building, the landlord spent nothing, and you can see it was a $5 million retrofit and $1 million a year in savings. You can see what the landlord reaps here having spent no money. Now, for those of you who are used to, kind of, green and sustainability presentations, you'll notice I haven't been talking a lot about that. I'm talking about real estate value. This is the value we can create by doing retrofits with someone else's money, and so I'm talking – when I talk to landlords and those of you on the phone who are landlords, you know, the goal here is to make retrofits economically rational for you by having us spend our capital.

Okay, you can click on through and I'll talk for a couple of seconds about some other asset classes. First are private universities and hospitals. So, private universities and hospitals are wrestling with limited – you know, they have only a limited amount of debt carrying capacity associated with their investment income and their fee revenue, and they husband that carrying capacity very carefully. Usually they're gonna use it to build new buildings, build a new laboratory. So, on the other side, they have needs for new buildings, new technology and facility upgrades. So, when it comes to – go ahead and click through, Chris. When it comes to am I gonna get a new lab or am I gonna get a new boiler? Sorry, go back one, Chris.

You'll see their imperatives are to motivate the donor base, attract better students, strengthen their grant applications, get top professors. You know, I don't need to belabor which of these options win, right? The new lab is generally gonna win – the university is not gonna use its debt carrying capacity for deferred maintenance, and if you click through you'll see Moody's is one of the credit raters that follows this sector very closely, and during the financial crisis they pointed out that a lot of private institutions couldn't get debt anymore, and those that could were paying higher rates, and they said, well, we think that they're just gonna switch to capital and operating leases, and notice the red language there. They said, well, that's just a debt equivalent.

So, they're saying we don't even care what the accountants say about whether that's on the books of the university. We understand what it is, and it's a debt equivalent. So, MESA, because it's not debt, allows the landlord, allows the university in this case or the private hospital, to use our capital and not affect our credit rating to accomplish retrofits without having to make that choice whether they're spending on a boiler or a new lab.

The other innovation we have is that we invite the private institutions to invest its endowment in the structure, so it can actually earn a levered return on greening its own campus. We've done this in a couple of places. There's a new initiative in Pennsylvania where the treasury of Pennsylvania is investing in MESA and the MESA structure and earning a return for Pennsylvania taxpayers doing these kinds of projects in higher ed and Direct Sole is the first place that that's being done. There are some other universities we've worked with and new ones emerging where we're beginning our – where we're seeing our energy analysis phase of those projects. So, that's how MESA applies to a private institution and why it makes sense for them to use the structure.

I'll take just one quick second on corporate and industrial property, if you could advance it, Chris. It's a little bit more straightforward in some ways for corporate and industrial property. They have competing priorities for their capital. So, funding for energy efficiency is wrestling against the CFOs juggling over just how much cash that's generated by a business to distribute to shareholders or to use to buy another company or how much cash is needed for working capital, and they have constraints on – so, those are the kinds of issues they're wrestling with for their own capital, and then they have big constraints on their borrowing capacity. They have to worry about their credit ratings, their debt market assets, things like their stock price and valuation, and of course, interest rates.

So, what we enable them to do is not – again, same thing, invest our capital, recover through the savings, no debt to affect the credit rating and frees up capital that they might use for shareholder distributions. So, I was just out in the outskirts of Chicago looking in an industrial facility where they're wrestling with exactly this question, and they would far prefer to use our capital than have to make this choice between the impact on their debt and their credit rating and distributions to shareholders.

So, I'm about to wrap up here with a few final points. One is to say that – you can advance, Chris. Oh, industrial property doesn't lend itself sometimes to the baseline plus adjustment methodology that I mentioned. So, I just want to highlight here that sometimes we need to use a slightly different savings methodology; for those who want to follow up, I can talk about how that works. It's a little bit harder where you have a very variable usage environment. It's harder to use the baseline with adjustment methodology of MESA; we have a couple alternatives that we use.

Okay, I would just add MESA's not just a concept. These are some clients and actual projects. The most recent one, a retrofit that's under construction now in New York City just closed a couple of months ago, so this is not something new under the sun. Actually, the first MESA projects were done in 2003. So, let me talk a little bit about the development process for those of you who want to know how do I do this thing? The first is we have to look at the real estate we're working in or the business we're working in and make sure that it's solvent. Since we are dependent on a business' ability to pay its energy bill, we need to make sure that it's gonna continue to be able to do that. The second step is we are going to spend a fair amount of time walking through a building or a property and benchmarking it with unit data, making sure that there's a savings opportunity. Was that a hint, Chris, that I need to speed up? I'll take it as yes.

So, these are the candidate buildings, 250,000 square feet or bigger, or a campus of various buildings. We need relatively high expenditure per square foot. We want 75 KBTUs of usage per square foot. These are the ways that we identify what a target is. We don't want huge rent rolls that are turning over so not more than 40 percent turnover in a given year which isn't that common, but some have major turnovers; that makes it hard for us to invest in a property, and central heating systems and cooling systems are helpful.

Okay, so you can go ahead and advance, Chris, and I'll wrap up. So, the Chicago Metropolitan Agency for Planning selected MESA as its primary offering for commercial industrial property; what does that mean? Well, first of all, they offer funding for predevelopment in the form of a loan. The predevelopment is all of the analysis associated with getting ready to build a project: energy modeling, bid document development, a bid process, and it's paid back out of the program, actually by Transcend Equity, if a project closes in MESA. So, there's a huge amount of design and development work that goes into creating a MESA project. Energy Impact Illinois supports those costs.

The second thing that they do with the funds they have from ERA is to provide credit enhancement for the debt that Transcend uses to fund its projects. That allows us to get better terms and do a deeper retrofit. So, they are having – these two elements have proven very, very important. I will say that the project in New York City I mentioned, ERA money supported that, and it was critical to getting the project across the finish line. So, these kinds of structures that the federal government has chosen to support have been very valuable and influential in moving projects forward.

How do you access the CMAP program, the Commercial Industrial Program? Here's my information. I will talk directly to you. We don't need any more than just my e-mail and phone number. One of the first things that we're gonna ask of you is one year of energy bills for all fuels, an equipment list and any physical condition assessments you have on a property, and a basic building drawing or CAD takeoffs that tell us the condition and square footage, and I would add what if I'm not in Chicago; what do I do? Go ahead and advance it, Chris. What if the property is located outside Cook and the surrounding six counties? The same thing, so we have some advantages that enable us to move quickly and support projects thanks to CMAP and ERA, but we will work nationwide. So, that's it.

Chris Lohmann:
Terrific. Well, thank you very much, Sean. This is Chris Lohmann again, and we can use at least the last 15 minutes that we've got scheduled of the webinar here for questions and answers, and I encourage you that if we don't get time to get to your question to engage directly with Sean, Dan or with me, and we can make sure that any and all of your questions are examined, and we can get some good answers for you. Since we do have a number of people on the line here, in the event that we have a whole lot of people that want to ask questions first, let me suggest that we use the Raise Your Hand option. If you look at the little control panel for your GoToWebinar, on the left-hand side you've got a couple of buttons. On the bottom of that, there should be a button with a hand in it. If you'd like to ask a question, punch that. It'll show up on my dashboard here, and I will be able to call on you. All right, terrific, the first hand up is from Andres Potes, and Andres I've un-muted your line now.

Andres Potes: Thanks, Sean, a very good presentation. I just wanted to ask, what's the timeline for, sort of, a typical building from when they come and do the initial analysis to when you can start doing the retrofit?

Sean Neill:
Good question. So, let's say that the initial information that's here on the screen right now, the utility bills and physical condition assessment and the building drawings are available, and we've identified that this is a good candidate property. We're gonna make a proposal to do a very deep-dive energy analysis that usually costs around $0.15 a square foot, okay, and that's the cost that Energy Impact Illinois helps to support through its loan offering. Usually utilities can cover some of that, and that's done by a local firm. Transcend doesn't make any money on that. It is just a modeling that needs to get done in order to create a project. That usually takes about three months, and we're trying to reduce that time span but right now it's about three months, and it includes a full preliminary design and bidding process.

So, when we're done with that we have the cost to build a project. We have the savings associated with that project, and we can negotiate the MESA and go to construction. So, you know, I would say the most optimistic, somewhere between five and six months to get a project from beginning discussions to building something. That, in the industry I would say, is a very fast turnaround. We're trying to compress that time right now actively, but that's, kind of, the best case scenario.

Chris Lohmann:
Terrific, thank you. Are there any other questions out there? If you're having trouble raising your hand through the electronic means, feel free to chime in right now. I'll mention that the slides here that Sean has presented as well as his contact information will be sent out. I've also recorded the webinar here, and we'll be posting that on the website. We'll send you the link to that website in a couple of days as soon as it is posted, and you'll be able to play it along with all of the voice commentary that accompanied the slides.

Dan Olson:
Chris, I don't know if you have any questions but before we move on can I just plug two more things real quick.

Chris Lohmann:
Please do.

Dan Olson:
Just for everyone on the phone, given that we've had – this was a great presentation, but I would also encourage you to, if you have other questions, go to our website which is EnergyImpactIllinois.org, and on that site you'll see that there's a tab for business, and as soon as you get to that landing page you'll see a feature of the Transcend model as well as our new building energy tool called Encompass which gives you, sort of, a dare I say fun way to look at building energy usage, and you can play around with that and maybe get a better idea if you don't know offhand how your building's performing, it's something that we're trying to engage building owners within the Chicago region as well.

And then the second thing I would just plug is because we are so, basically, enthused about this program, we are trying to get as many people started and get down these pathways to get into this program. One of the things we're offering, Sean mentioned before that the predevelopment loan is, sort of, the first piece. We, for the program, have just, sort of, announced that the first five buildings that we can get into this would have the upfront predevelopment loan fully covered under this program. So, if anyone's out there and they're really thinking this is an opportunity, I would encourage you to get in touch with Sean as soon as possible, and if you have any other questions you can always talk to me as well.

Chris Lohmann:
Terrific. Well, I don't see any more hands up so I'm gonna assume that means that any questions that might be out there can wait a little while. Again, I'll encourage you to reach out to any of us, Sean, Dan or me, at any time. I'll have an e-mail out to all of the attendees of the webinar shortly with the slide deck and contact information, and then in a couple of days once the webinar has been posted I'll send you out a link to that. You can share that with other folks, and I look forward to continuing this discussion with anyone and everyone who's interested in getting the maximum value out of their buildings. So, with that, I think we'll wrap this up. Thank you very much, Dan. Thank you very much, Sean, and thank you to all of you who were able to join us today.

Sean Neill:
Well, thanks, Chris.

Dan Olson:
Thanks, everyone.

Chris Lohmann:
Thank you.

[End of Audio]